As a long-time fan of professional wrestling I've come to see how much of mortgage servicing resembles what goes on in the ring. Like wrestling the servicing business is full of "works," "gimmicks," "heels and baby faces," so let me explain.
In wrestling's colorful vernacular you've got the good guys everyone cheers for, so-called "baby faces," squaring off against evil opponents known as "heels." Think Hulk Hogan versus the Iron Sheik in WWF's memorable 1984 Heavyweight Championship. "Baby face" Hogan played to the crowd as Mr. America -- his "gimmick" -- while the "heel," Iron Sheik, riled the crowd up with his Iranian "gimmick." The choreographed routines -- called a "work" -- were convincing enough in their violence to have the audience respond with lung-busting approbation.
Ok, wrestling is wrestling, but mortgage servicing? I'll try and make my case.
"Dual tracking" is where you can find servicing's version of "baby faces" and "heels." It works like this: while a homeowner is encouraged by customer service reps, "baby faces," to send in reams of documents for potential loan modifications (including HAMP), their back room servicing colleagues, "heels," are preparing a foreclosure action. Many a borrower thinking that they're on track for a loan modification are suddenly thrown to the mat when a legal notice arrives proclaiming an "intent to accelerate" the mortgage loan and this has nothing to do with fast and furious drag racing but everything to do with a foreclosure. In the colorful vernacular of the servicing industry "intent to accelerate" translates in simple English as pay up the full amount of your loan, including interest, penalties, etc. or pack up your bags, your family, your life and make a beeline for the door.
Chris Wyatt, a former Litton Loan executive, can speak volumes about other revenue enhancers like the "western union gimmick," which worked like this: customer service reps encouraged homeowners to make payments using a so-called "convenience fee" option like Western Union. Why? At $10 to $20 charged to the borrower for these transactions (depending on the servicer) the profit potential was jaw-dropping. "During my tenure in the mortgage industry," explained Wyatt, "the actual cost to the servicer for each payment received was approximately $0.68 per transaction." So, Litton Loan after paying the pittance to Western Union, was swimming in the additional revenue stream. In fact, customer service reps were incentivized with bonuses based on the number of convenience payments collected during the month. It was big money for Litton Loan claims Wyatt bringing in as much as $6.5 million annually.
Then there are the "property inspections," usually an outside contractor eyeballing the homeowner's property on a drive-by to make sure the house is still standing and that can dump anywhere from $9 to $11 on a homeowner's monthly statement. "BPO's" ("Broker Price Opinions") can go for $100 and up and this goes to a local realtor to file a report estimating the worth of a homeowner's property. It's a "I wash your back" trade-off with the servicer getting information and a friendly partner getting cash (servicer's don't usually mark up this charge, according to Wyatt). In the end, however, it's the homeowner that pays the price.
The big daddy of all "works," no doubt, is the "force placed insurance gimmick" and it involves a well choreographed and intricately spun set of relationships between banks, their servicers, insurance companies, re-insurers, mortgage brokers, et al. It's akin to a mob-style "bust out" with homeowners (and investors) eventually getting whacked.
The concept of force-placed insurance is simple. When a borrower fails to maintain homeowner's insurance because the policy hasn't been renewed or there's some lapse in coverage the servicer will purchase what's known as a force placed insurance policy on the borrower's home. It's supposed to protect the interest of the mortgage investor but a recent investigation by New York's Department of Financial Security determined that "there appears to be a number of very significant problems with force-placed homeowners' insurance." Among the problems highlighted by the investigation: "the price is often extremely high -- as much as ten times the normal rate for homeowners' insurance and sometimes consumers have this high-priced policy forced on them when their own insurance is still in place"
Major insurance companies like Assurant and QBE push these policies, according to the DFHS report, kicking back commissions to their bank/servicer partners based on the value of the policy and then spread the wealth by sharing risk with so-called "re-insurer's" like JP Morgan Chase. Given the mutually profitable relationship the bank/servicers are loathe to report any claims that would financially impact their insurance partners given that the beneficiary would be the mortgage investor so in this mob-style bust-out the investor gets shafted along with the homeowner. Stratospheric insurance premiums provide further weight to the concrete overshoes worn by debt-laden homeowners struggling to stay afloat.
In March of this year the Cuomo Administration settled with Assurant, the country's largest force placed insurer, having the company cough up financial restitution for harmed homeowners together with a 14 million dollar penalty paid to the state. A press release issued by Department of Financial Services indicated, however, that there were other insurance players out there who needed to "step up to the plate now" and implement the same reforms agreed to by Assurant. Does this mark the end of this lucrative servicing "work?" Only time and the regulators will tell.
I grew up in 1950s Brooklyn glued to a crappy little TV which never seemed to work properly no matter how much you fiddled with the bakelite and metal antenna tottering precariously atop the faux mahogany cabinet. It was aggravating as hell when you were desperately trying to stabilize the image just as the announcer was introducing the likes of Killer Kowalski, Gorgeous George, Gorilla Monsoon or Haystacks Calhoun. When things finally settled down you grabbed your Turkish Taffy and ten ounce coke sat back and enjoyed the unfolding spectacle. "Gimmicks" and "works" in pro-wrestling delivered a diverting and entertaining experience. Their mortgage servicing industry equivalents, on the other hand, deliver only heartbreak and despair.
Joel Sucher, a filmmaker with Pacific Street Films in Hastings-on-Hudson, N.Y. is working on Foreclosure Diaries, a documentary about the financial crisis and has blogged on foreclosure related issues for American Banker. and Huffington Post. He is currently working on a memoir of mid-century Brooklyn titled, Salugi.